ACSJC Occasional Paper No. 17
Banks and Social Responsibility
by David Farmer
Contents
Chairman’s Message
Introduction
Biblical and Church teaching
What is social responsibility?
Do freer market forces further society’s common good?
The public good argument
Are there public good aspects to the banking industry?
How should this appropriate level of public trust be achieved?
The deregulation of the 1980s
Problems with pre-deregulation retail banking
The process of deregulation
Deregulated retail banking: An assessment
Have retail banking margins widened?
Is retail banking effectively competitive?
Have there been losers from deregulation?
Have banks abused customer ignorance and inertia?
Have banks handled credit cards responsibly?
Should basic banking be seen as an essential service?
Concluding assessment
Appendix: An overview of Australian banks and their operations
Endnotes
Table: Components of a major bank’s balance sheet
Chairman’s Message
Banks and Social Responsibility is No. 17 in the series of Occasional Papers produced by the
Australian Catholic Social Justice Council (ACSJC).
Rather than providing a detailed response to recent events within the banking industry, this
paper reflects on standards that need to be upheld.
The banking industry now touches on all aspects of our economic life. It would be difficult to
find a household that banking has not affected; even pension and other support payments
require a bank account. As Mr Farmer argues in the conclusion to this chapter titled Should
Basic Banking be seen as an essential service?, it appears that ‘access to banking services has
1
become a prerequisite for community participation’. Should our governments require our
banks to provide a basic banking service for everyone?
The ACSJC would welcome feedback on the paper and questions raised within it, for
possible use in our quarterly newsletter Justice Trends.
+ William Brennan
Chairman, ACSJC
Bishop of Wagga Wagga
20 July 1993.
Introduction
Banks and bankers have in recent years occupied prominent positions on the Australian
public’s ‘hate list’. People have argued that bankers have abdicated their social responsibility.
Have bankers been fairly treated? Have their customers?
While in many ways banking is like any other industry, there are important differences.
Banking penetrates almost all households and all business enterprises. Like the legal and
education systems, banking services are a necessary foundation for the rest of the economy.
Moreover, when banks tighten or ease their lending conditions, either through imposed
monetary policy or their own internal guidelines, almost all business and personal customers
are directly or indirectly affected.
Banking has been and still is a highly regulated industry. In addition to its own legislative
framework, it has its own regulatory authority, the Reserve Bank of Australia, dedicated to
preserving the safety, and public perception of the safety, of banks. It has also had three
major government inquiries in a decade.1 Scarcely a year has gone by without a major change
in banking regulation. The largely deregulatory phase of changes in the early 1980s has been
followed by a systematic re-ordering of prudential supervision.2
Some have lauded the deregulated financial sector, citing greater diversity and tailoring of
banking services. But this does not appear to be a view generally held by the public, who
might only have noticed uncomfortable interest rates and new banking charges.
A significant part of the poor popular image of banks is clearly misplaced. The most
prevalent misconception (often shared by the non-financial media) attributes to banks, rather
than to those regulating monetary policy, the prevailing levels of market interest rates. The
extended period of very high market interest rates in 1989, a deliberate policy of the
monetary authorities, undoubtedly made ‘bank-bashing’ more widespread and strident.
None the less there remain a number of issues in regard to banks and banking for those
interested in social justice.
At the core is a fundamental concern not restricted to banking but shared by a host of
industries and parts of the public sector that have experienced greater exposure to market
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forces: Does a shift towards a freer, more market- driven (albeit still regulated) industry
weaken or advance social justice?
There are also specific banking issues: Is retail banking competitive enough to ensure that
margins are not excessive? Are all deposit products priced competitively? Is credit card
pricing fair? Is basic banking an essential service and, if so, should its pricing and provision
be left to the free market? Are consumers of banking services informed and skilled enough
for free markets? Do a small number of dominant banks and a multitude of insignificant retail
consumers represent a level playing field?
But first this paper will survey relevant biblical and Church teaching and propose a
framework of social responsibility. From here it will consider the basic question of whether
freer markets tend to lead to more socially responsible actions and whether banking has
public good aspects that make free markets inadequate. From here the paper will get into
specifics: the deregulation of the 1980s and particular issues of banking practice or
mispractice. The structure and operations of the banking industry are covered in an appendix.
Biblical and Church Teaching
Not surprisingly, there is little detailed teaching on modern banking issues; rather only broad
themes on which a Christian stance may be founded.
Many would be aware of the Old Testament teaching against the practice of usury or the
taking of interest.3 Interestingly, the Hebrew word for interest comes from the verb to bite.
Closer inspection of the references, however, shows that emphasis is on discouraging this
practice with ‘your brother’, rather than with those outside one’s group. As well as indirectly
suggesting that the charging of interest was widely practised, the Old Testament laws and
prophetic condemnations principally show concern for the divisive intrusion of this
commercial practice into the body of the chosen people.
One needs also to remember that the Old Testament period covered the gradual transition
from bartering with cattle or other movable produce to weighed precious metals and thence to
minted coinage (appearing around the time of the Babylonian exile in 6th Century BC). This
trend towards money could easily have been linked with protestations about increasing
commerce, urbanisation and cultural mixing. Moreover, money-changers in the Hellenistic
period, if not before, were generally conspicuously located near religious sites as the places
not only of congregation but also increasingly of commerce. On balance it is surprising that
there is no significant condemnation of money and moneychangers in the Old Testament.
New Testament teaching on banking is also imprecise. There is an acceptance of the practical
reality of interest and of debts and their consequences,4 and there is a continued stress that
such practical matters should not come before mercy and between brethren,5 and certainly not
before one’s relationship with God.6 ‘Render therefore unto Caesar the things which are
Caesar’s; and unto God the things that are God’s’.7
3
Beyond this level of acceptance we come to the creative tension between the worldly wisdom
of the ‘wise steward’8 and the folly of the ‘new creation’.9 To which of these elements do we
turn when we look at issues of economics, banking and social responsibility? Clearly the
realm of worldly wisdom provides more pragmatic guidance, and is comfortable accepting
and using such social constructs as markets. The new creation, the new life, perhaps has little
place for the obligations of banking or for so many other pragmatic social conventions, but it
seeks more to transcend rather than to condemn them. On balance New Testament teaching
appears broadly to encourage worldly wisdom’s development of social institutions to achieve
worthy goals, but with the constant reminder that these human pursuits remain incomplete.
The early and medieval Church cemented the Old Testament prescription against usury, at
least among Christian brethren, reaching its formal condemnation at the Third Lateran
Council in 1179.10 The medieval doctrine of the just price represented an attempt to apply
Christian ethics to every part of life. Essentially it perceived justice to require every
transaction to return equivalent value to both parties. In the case of a loan there was
considered to be no change in the value of money merely due to the passage of time and
hence no intrinsic basis for interest or anything other than repayment of principal. However,
this strict position was modified to permit the payment of interest when a loss of opportunity,
such as an alternative income-earning investment, was suffered by the lender. The growing
practice of charging interest as commerce and banking grew in later medieval and early
modern times was justified along these lines, despite many Scholastic writers retaining their
condemnation of usury.
In more ‘scientific’ modern times, the idea of a just price has lost much of its support.
Modern Church teaching appears to accept the classical economic idea of prices constantly
varying to reflect market circumstances and of interest being simply the price that balances
and rations the demand for and supply of funds. Rare now in western countries are arguments
against interest per se.
However, while markets may be accepted as providing an efficient decentralised rationing
tool, they are not accepted as a necessarily appropriate or final arbiter of social justice.
The mechanisms of the market offer secure advantages: they help to utilise resources better ...
nevertheless, these mechanisms carry the risk of an ‘idolatry’ of the market, an idolatry which
ignores the existence of goods which by their nature are not and cannot be mere commodities...11
Market economics must ‘... be guided by the common good and be at the service of human
dignity and human rights’.12
This continues the broad theme that nothing of commerce, nothing pragmatic, should usurp
higher claims on humanity — the markets and the competitive forces that shape market
equilibrium have no claim to a paramount role in humanity’s conduct. They are part of this
world, a world in which the Christian is to be wise, but also a world of the new creation.
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What is social responsibility?
We will take the ideas previously mentioned for our framework of social responsibility. A
socially responsible action is, then, one that serves human dignity and rights and furthers the
common good. Human rights include freedom and autonomy as a member of a larger
community. Community and the common good encompass the world as we know it,
including the physical and psychological environments.
In looking at banking we come more readily to the economist’s notion of an optimal
economic outcome. This implies that for a given initial allocation of resources among
economic agents (that is, people), there is no possible outcome where an individual can be
made ‘better off’ without another ‘losing’. While embodying the idea of individual
autonomy, this theoretical economic utopia is a somewhat pale version of the goal of social
responsibility. It does not, for example, concern itself with the realism of its assumptions
about the autonomy of the individuals involved; it does not allow for hard decisions about a
fairer reallocation of the ‘initial’ resources, or for developments over time; and when you
start talking about psychological factors, well, economists generally throw up their hands.
But it is a start.
Do freer market forces further society’s common good?
The core question is whether freer market forces imply a gain for society as a whole. It is
certainly not clear that the general public shares the confidence felt by many economists and
bankers that these two are linked. Nor is their degree of confidence always well founded.
This applies in particular to the loose notion, popular in some quarters, that free markets
necessarily lead to a better result for everyone. This proposition cannot be proven with
realistic assumptions, and this paper’s aim is not to attempt to do so, but rather to give some
meaning to the idea of free markets to those people who have to cope with them. The
strengths and limitations of free markets will be explored by way of a simple example.13
Consider an isolated valley in which only two people live, both making bread and producing
milk and cheese. It is quite possible that one might prefer or be better at bread-making than
the other. If so it is likely that eventually the two will freely agree to specialise and then trade
some of their produce. This might only occur for some of their production, or they might
specialise entirely and each only produce bread or dairy goods. Economies of scale and the
continued building of skills are likely to help this process towards specialisation and trade.
Importantly, we can be confident that both would consider themselves better off, or they
would return to looking after themselves.
Sounds ideal. There is no need for some puppeteer (or regulator) from the next valley to
determine the exchange rate between bread and milk. Moreover, the arrangement is adaptable. Should the wheat harvest flourish and the bread-maker make more bread, the freely
agreed bread/milk exchange rate will probably adjust as the bread-maker has more bread to
exchange than before and wants more of the limited quantity of milk and cheese to go with it.
Again, both are likely to consider themselves even better off with trading than without.
5
Should the dairy farmer discover the method of making butter he or she would be likely to be
able to bargain for more bread, but again with both feeling they have gained. After all, if
trade occurred the extra bread would be voluntarily given.
Should the population of bread makers and dairy farmers flourish, trading would become
even more established. Should too many of the valley’s population produce bread, then the
amount of milk and cheese a loaf of bread buys would fall, and some (probably the least
efficient) bread-makers might change to producing milk and cheese. Alternatively, some
dairy farmer might specialise in milk, others in cheese and, by doing so, both increase their
productivity and quality. Again, all in the valley would probably see themselves as gaining
from the development.
The power of this flexibility and free decentralised decision-making is seen as the hallmark of
a free competitive market — a hallmark sometimes stated as ensuring that everyone benefits
from free trading.
It is possible to construct simple models built either on economies of scale or on the idea of
people having different skills (or ‘comparative advantage’) that ‘prove’ that such
specialisation with free-market trading inevitably leads to benefits for all participants.
However, in practice the valley may well have developed differently. A bread-maker might
steal cheese from a dairy farmer who is occupied with milking the cows. Or the bread makers
might agree to hide some of their bread and persuade the dairy farmers that bread is very
scarce and, consequently, each loaf should be worth much more milk. Or the bread makers
might deliver poor-quality loaves made with dust rather than pure flour.
Alternatively, the dairy farmers might be twice the size of the bread-makers and simply
demand or take bread. Or perhaps bread-makers are never taught to count and are regularly
deceived. Or the tradition of the valley might be that dairying is considered a closed and more
noble profession than that undertaken by those involved in mere crop-growing, milling and
baking. Any of these might restrict the amount of dairy products produced and ensures their
high price in terms of bread. Historically, there have been more questionable rationales than
these for privilege and restricted entry.
So what has happened to the free-market utopia? Some often forgotten elements, or ground
rules, are missing. They include a legal framework that ensures that each person can make
free decisions to exchange — that is, is protected from theft and intimidation, and from
deceit, unacceptable quality or non-compliance with an agreed bargain. There needs to be
freedom to change industries. Enough information and basic levels of skills and education are
also required to have confidence that both parties know what they are trading.
Clearly there is a role for law and order, for regulation to eliminate barriers to entry and to
ensure fair play and for pro-active supervision to ensure that the participants’ information and
judgement skills are sufficient. Only as adequate ground rules are in place, and participants
become sufficiently informed and capable, are the benefits of free markets, influencing
decisions on pricing and the amounts produced, traded and consumed, likely to be realised.
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Are these ground rules in place in banking? Are there effective barriers preventing new banks
emerging? Are both sides to a banking transaction sufficiently informed to ensure a fair and
non-intimidated market? Only with such ground rules is the power of freer markets likely to
be pulling in the social interest.
The public good argument
Even if these ground rules are in place there is an argument that suggests that more
competitive markets will not always, by themselves, produce the best outcome for society.
This argument points to parallels between some banking services and goods and services
such as defence, roads or communications networks. The distinguishing factor is that it is not
practical to package and sell the good or service separately to individual consumers.
For example, how can you restrict the benefits of defence purchased by one buyer from being
felt by his or her neighbours? Given this, how much defence would an individual buy? Rationally, most would buy none and instead rely on the defence bought by their neighbour.
Because of this free ride ability these ‘public goods’ tend to be undersupplied (compared with
the aggregate underlying demand) if left to individual purchasing decisions in a free-market
environment.
Consequently, these goods have traditionally either been provided by governments with
funding via taxation or their supply has been controlled or facilitated in some way.
Governments have been awarded the social responsibility to ensure that the right level of
these ‘public goods’ is provided.
Are there public good aspects to the banking industry?
The most obvious public good aspects to the banking industry are perhaps the confidence that
is held in money as a means of transaction and the security that is associated with banks as a
place to store savings. Our decentralised economy with its level of individual economic
freedom is implicitly built on trust in money as a means of exchange in return for goods or
services. Yet no one person would be prepared to pay for the achievement and maintenance
of this trust. Clearly we have a public good that needs to be provided at a suitable level for
society as a whole.
Similarly, trust in the security of our banking system as a place to preserve and store savings
needs to be built and maintained by the community at large, rather than left to individuals.
Instead governments have either provided or ensured the provision of these goods. The
Reserve Bank prints the notes, the Treasury mints the coinage that comprises our currency.
The government and the Reserve Bank regulate the banking industry to ensure that it is and is
perceived to be a secure haven for savings. But it is not possible to demarcate cleanly where
the public good elements end.
For example, traditionally cheques have been regarded as essential components of the
transaction system. More recently, credit card payments and electronic payments have
7
assumed far greater importance. All of these are provided by the banking industry, and the
regulatory bodies are less centrally involved than with currency.
Moreover, the safety of deposits (and indeed of the transaction systems) cannot be separated
from the broad perception of a bank itself. News of large loan losses, questions of ethics indeed any behaviour of a bank — inevitably impinge on the public trust in the banking
system. Consequently, there is a public good argument that optimal levels of public trust in
the banking system will not be achieved unless some additional constraints are placed on
bank behaviour beyond those demanded by individual consumers. Such consumers might be
attracted to the better interest rates offered by a more risky bank, relying on others to ensure
that the riskiness of the banking system as a whole is kept within appropriate bounds.
A third public good aspect is the breadth of the payment system. It is clearly an advantage to
all if the various payment systems have full national or international coverage. A company
paying its staff can then do so through one magnetic tape to its bank which remits salaries to
bank accounts across the system. A mail-order sales group can reasonably restrict itself to
credit card purchases because of their wide usage.
A fourth and perhaps less traditional public good argument can also be made. Banking
performs the lubricating role between other components of the economy, not only in
channelling funds from depositors to those seeking funds for capital investment, but now also
by mediating between entities’ different risk profiles with risk management products. Many
of these new risk management products, such as swaps and futures, require some
infrastructure such as an exchange or clearing house and certainly a level of trust and
liquidity before they can be used — both public good elements. Left to themselves, banking
consumers are unlikely to demand the full prudential safety from these new products that
collectively they might be prepared to pay for.
It is clear, then, that intervention is required to ensure that the banking and payments systems
hold the appropriate level of public trust and develop in an appropriately prudential manner to
continue to hold this trust while meeting the changing needs of their users.
Moreover, given these public good aspects, it can be said that banking probably has a higher
social responsibility than other industries. But it is not alone; others in such company would
include, for example, communications and media services, education and medical services.
How should this appropriate level of public trust in banking be
achieved?
In some industries with public good aspects an appropriate level of trust is achieved by the
service being provided via the public sector. Defence and policing services are obvious cases,
and few would lament that public provision. In others appropriate provision is achieved by
subsidising the cost of the good in question; for example, in some private public transport
networks.
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However, these are not the only ways in which public goods are handled. Standards of safety
and training that underpin the public’s faith in various industries, such as medicine, are
achieved not solely by public provision but by accreditation of those who practise and
subsequent regulation of their behaviour. In such industries it is not practical to demarcate the
desired public good, such as safety, and thus promote it separately from the goods and
services being consumed.
It is along these lines that the banking industry has been modelled. Some components of the
desired public trust have been achieved through public provision; for example, the printing of
currency, the banking supervisory services and the recent expansion of registry services by
the Reserve Bank, and the work of the Australian Securities Commission. But public
provision risks losing some of the flexibility also required of a banking system. Equally or
more important to the achievement of the appropriate level of public trust in banking has
been the effect on banking behaviour achieved by formal conditions attached to the banking
licence and the consequent formal and informal influence this licensing provides the Reserve
Bank over each bank.
Together these means have modified the behaviour of banks and bankers from what would
have occurred in a freely competitive environment.
Achievement largely by regulation or formal or informal code of behaviour rather than
simply by public provision or subsidisation shifts some of our focus to the regulator, namely
the Reserve Bank. If the regulator influences the behaviour of the industry, we need to
consider whether the regulator’s goals are in line with our understanding of social
responsibility.
But first we need to move beyond the general to the specific issues of banking today and of
the deregulation that has shaped its character.
The deregulation of the 1980s
The word deregulation requires clarification. Very few would advocate an unregulated
banking sector. With public confidence in the safety of the payments system and in bank
deposits a paramount requirement, the need for some prudential ground rules is almost
uniformly supported. The debate and deregulation of the 1980s has been concerned with the
nature of these rules and, in particular, whether there is a need to control the type, quantity
and price of a bank’s services as closely as was done in the post-war period until the 1980s.
Problems with pre-deregulation retail banking
First let’s consider some of the perceived shortcomings in the financial system, particularly in
the retail component, that deregulation was intended to address.
In the 1970s the trend for retail depositors and borrowers to move from banks to non-bank
financial institutions such as building societies strengthened. There were more intending
home mortgage and other borrowers than the banks could service while subject to the
9
prevailing interest rate controls and lending volume constraints. Banks rationed their
available funds by utilising conservative loan-to-valuation ratios, by imposing savings history
requirements on intending borrowers and by being relatively inflexible in the loan structures
offered.
Other institutions, such as building societies and finance companies, were subject to different
and generally easier regulation and consequently were often able to be more flexible, albeit at
higher interest rates. The higher lending rates permitted them to offer more attractive interest
rates for funds, thus attracting depositors away from banks.
Depositors were further attracted out of the banking system in the early 1980s with the launch
of cash management trusts, which offered close to professional market interest rates.
This development might appear to be a simple case of competition, but if so then it was
largely competition between regulatory regimes and not between individual financial
institutions. Indeed many of the finance companies were in fact owned by banks, and
business was often retained within a banking group. One result was to shift retail customers
to less regulated segments of the financial sector, generally without the customers being fully
aware of the difference. Another was the continued reduction in the proportion of the
financial system (the banking sector) over which the monetary authorities’ policies directly
applied (from 95% in 1936 to 58% in 1980).14
Moreover, the banks’ means of rationing available loans was likely to be administratively
more costly and less flexible and hence less efficient than rationing via price (that is, by
varying interest rates). Equally, though less seen as a problem by retail customers, bank
competition for deposits other than by price probably led to inefficiencies such as excessive
unfocused image advertising, an overextended branch and agency network, and unnecessary
and expensive face-to-face handling of banking transactions. While each of these offers some
positive benefits, the benefits need to be balanced against costs incurred elsewhere (such as in
lower deposit interest rates).
For those customers who remained with banks the choice of services was often limited.
Imposed interest rate and term regulations restricted the services banks could offer. In
addition the banks, experiencing more demand than they could meet, had little incentive to
make their products flexible.
Interest charges on variable-balance loans (such as overdrafts, credit cards and mortgages)
were calculated on a daily balance basis, whereas interest on most variable-balance retail
deposit accounts was calculated on the minimum monthly balance. Competition among banks
was not enough to force a change in this practice (which would increase the cost of existing
deposits). Nor at that time was there enough customer awareness or any effective consumer
lobby seeking a consistent approach to advertised product interest rates.
Even when, before deregulation, bank interest rates did follow rises in market rates, a large
proportion of retail depositors missed out. Higher deposit interest rates and better access
conditions were generally only offered selectively on new deposit products aimed at the more
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aware retail customer. Customer awareness and competition was not enough to force banks to
adjust their rates on their traditional deposit range.
Critics consequently saw benefits in opening up a relatively protected and constrained
banking system to competition, including from foreign banks and global financial markets.
Implicit was the view that the banks had become a little inflexible and heavy — showing in
over-generous staffing and staffing conditions, and in poor industry performance compared
with other industries, and likely to be constraining international competitiveness of other
Australian industries.
The process of deregulation
Despite some minor loosening of banking regulations (for example, interest rate controls for
large loans and deposits) in the 1970s, it was not until after the Campbell Inquiry released its
Final Report in September 198115 that a strong momentum for replacing intrusive regulatory
controls with market mechanisms emerged.16 In 1982 constraints on bank deposit terms were
substantially eased, direct guidance on bank lending volumes ended and constraints on
savings bank assets eased.
Although the trend towards relying on changing interest rates as the prime instrument of
monetary policy was already in train, it was the December 1983 floating of the Australian
dollar by the new Labor Government that made the trend irreversible. By removing any
material barrier to global financial markets, the government virtually committed itself to a
complete deregulation of Australia’s interest rates. If customers could relatively freely invest
or borrow overseas at market interest rates with forward exchange cover, then domestic
constraints would quickly be bypassed. Indeed it took less than thirty months before all bank
interest rate controls, including those on the politically sensitive new housing loans, were
removed.
Now, if they wish to use monetary policy to restrain or stimulate the economy, the monetary
authorities exert pressure directly on interest rates, particularly on the call and short-term
interest rates at which the Reserve Bank deals directly with financial institutions. The
monetary authorities rely on this pressure to influence both the rates at which banks and other
financial institutions lend and take deposits from their customers and that this cost of funds
will in turn affect their customers’ economic decisions. (Perhaps not surprisingly, the first
time this mechanism was used, in the late 1980s, it took a longer period and higher interest
rates than many expected for the ‘tightening’ message to get through effectively.)
This reliance on interest rates contrasts with earlier constraints on bank lending volumes,
either by quotas or via increasing the proportion of loanable funds banks need to lodge at the
Reserve Bank. Though used effectively over earlier decades, these policies had encouraged
the movement of business away from Australian banks to non-banks and foreign institutions,
thus reducing the size of the sector over which the policies operated.
The deregulatory changes towards free interest rate and currency markets were the more
public offspring of the Campbell Inquiry, whose terms of reference had emphasised the
11
importance of efficiency and the then government’s free enterprise objectives. None the less,
the Campbell Inquiry was also concerned with the safety of the banking system and the
necessary prudential controls to achieve it. Rather than closely prescribing a bank’s business,
the Campbell Inquiry suggested reliance on the bank’s capital or equity base. Measures of its
adequacy had to take into account the bank’s assets and business mix.
These capital adequacy requirements were introduced gradually in the second half of the
1980s in line with or slightly ahead of comparable developments overseas. Replacing the
protection offered by tight controls over the banking industry, this shift permitted both the
influx of foreign banks and a new banking environment encouraging innovation and
flexibility subject to competitive forces — and the maintenance of adequate capital.
With the changes of the 1980s much of the vision of the Campbell Inquiry has been achieved:
‘a more open and flexible financial system, substantially free of intrusive government
controls and regulations’.17
Deregulated retail banking: An assessment
Some of the results of deregulated retail banking are fairly clear.
Product innovation and diversity has accelerated, including a wide range of products made
possible by deregulation: interest-paying cheque accounts and wider ranges of term deposit
and housing loan packages (including low-start, fixed rate, variable repayment frequencies,
etc). Price rationing has largely replaced less efficient rationing of available lending funds
and has improved overall returns to savers. The banking sector has reclaimed much of the
retail drift to non-bank financial institutions of the 1960s and 1970s. Some of the inefficiency
of consumers needing to deal with more than one type of institution has been reduced, and
regulatory control has tended to become more uniform and effective. Indeed the
rationalisation in the supervision of the banking sector has encouraged a similar
rationalisation for other components of the financial system.
Competition between individual banks for both deposit and loan business has grown.
Increased competition in turn has contributed to a growing customer awareness (albeit slow)
of the differences between banks and between products, and appears to be increasing
consumer mobility between banks. People are more aware of interest rates and the effects of
their changes. Similarly, awareness of differences in terms and conditions attached to banking
services has been gradually enhanced.
In corporate banking competition sharpened significantly, particularly with the arrival of
foreign banks in the mid 1980s. Indeed it is now considered to have been excessive and a
major contributor to significant bad debts recorded by the banking sector.
Other results are more contested:
•
•
•
Have retail banking margins widened with deregulation?
Has retail banking become truly competitive?
Are there winners and losers from the shift to deregulation?
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•
•
•
Have banks, with stronger economic power, abused customer ignorance and
inertia (such as with passbook savings and credit cards)?
Should basic banking be regarded as an essential service?
Is there a need for an on-going social justice watch-dog?
Have retail banking margins widened?
Much was made in the press of whether banking margins widened after deregulation and
whether retail banking margins are subsidising loss-making corporate banking.
It is essential to understand the jargon. The absolute level of market interest rates (as dealt in
the professional market for substantial amounts) depends on the monetary authorities’ setting
of monetary policy. It is the Reserve Bank that sets the overnight rate around which all shortterm market interest rates revolve. Expectations about inflation in conjunction with the
operations of the monetary authorities largely determine long-term market interest rates.
Banking margins refer to the interest rate spread between the interest rate of a bank product
and the relevant market interest rate. These margins have to cover any credit risk, any human
or computer handling costs, any prudential reserve cost and a sufficient return to the bank’s
shareholders for the capital involved. Such a return on capital clearly needs to exceed the
yield on risk-free government bonds — that is, it needs to be higher in high interest rate
periods.
Banks do not use particular deposit products to fund particular loan products; rather they raise
funds via a range of deposit products, all with their own interest rate and handling cost
structures, and lend via a range of lending products. So it is not very useful to look at a spread
between particular products, such as between new housing loans and savings investment
accounts. Not only do each of these have a range of possible interest rates, but they also have
different volume and term characteristics — housing loans have grown rapidly and are
generally for terms of up to twenty- five years while savings investment accounts have not
grown significantly and are generally available at call.
As a general rule each deposit and loan product needs to justify itself by comparison with the
relevant market rate (the rate at which funds could be raised or lent to the money market with
very low handling costs). So the margin on savings investment accounts would be the spread
between the average interest rate paid and a short-term money market rate.
Problems still remain. For example, housing loan rates were capped at 17% in 1989 following
an agreement with the government while appropriate market rates rose above 18%. Clearly
bank profitability at this time had to come from greater margins on other, particularly deposit,
products. Increasingly, however, each deposit and loan product is being forced to stand on its
own feet.
One of the trends in banking margins since the early 1980s has been a gradual shift from
deposit margins to lending margins. This shift reflects both inertia in bank rates in earlier
13
decades as inflation and market rates rose and the earlier regulatory caps on bank lending
rates. Both of these factors have been removed by deregulation.
Clearly, then, suggestions that bank margins have widened unfairly need to be carefully
appraised. First, the effect of market rate movements needs to be removed. Secondly, the
rising of both bank deposit and lending rates relative to market rates needs to be allowed for.
While absolute rates increased (until 1990) and many lending margins have increased,
deposit margins have generally narrowed.
On balance, although particular products such as credit cards and traditional passbook
accounts warrant special attention (given below), there is no convincing evidence that overall
bank margins have widened over the past decade of deregulation. Rather they appear to have
narrowed. The issue was addressed fully by the Martin Inquiry18 and has recently been
covered directly by the Reserve Bank,19 which notes:
On their Australian domestic business, it is estimated that average net spreads for the major
bank groups were about 5 percentage points in the first half of the 1980s and about 4.5
percentage points in the second half. In 1990 and 1991, average net spreads fell to 4
percentage points or less.
There is, however, more evidence of a shift in the balance between margins on corporate and
retail banking. Problems with availability and clear interpretation of data preclude any simple
conclusions, but this paper agrees with the general consensus that corporate margins declined
markedly during the 1980s while retail margins did not.
Probably the narrowing of margins in corporate banking was temporarily overdone in the
initial competition with the newly established foreign banks. None the less, even with the
banks’ experience with rising corporate bad debts, corporate margins appear to be well below
pre-deregulation levels. But does this mean that they are being subsidised by retail banking?
It depends largely on interpretation. The Martin Inquiry reports that the Reserve Bank ‘does
not believe that consumers are now subsidising loans to big business but deregulation has
removed the “heavy cross-subsidisation in banks that went in the other direction”’.20
The Reserve Bank sees the change as removal of an inappropriate pre-deregulation subsidy to
consumer banking whereas many consumer welfare groups see the trend as a new unfair
subsidy by the retail sector. Underlying the Reserve Bank’s contention is the belief that a
freer, competitive market has emerged and is less likely to allow cross-subsidisation than the
previously more regulated market. Whether the deregulated market is competitive enough for
this confidence is addressed below. After that the issue of winners and losers from the
deregulatory shift is also addressed.
Is retail banking effectively competitive?
Although the number of banks has increased sharply since the early 1980s, the new foreign
banks have had a very minor impact on retail banking, and some of the growth in bank numbers simply reflects an offsetting reduction in non-bank financial institutions such as building
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societies. In particular the increase in dominance of the four major banks, with roughly threequarters of the retail market,21 and some lingering suggestion of collusion in price-setting
between these four, raises doubt as to whether there is effective retail banking competition.
It is a critical question as only an affirmative response will give confidence that use of freer
market forces will improve the efficiency of the financial system.
This was one of the Treasurer’s terms of reference to the Martin Inquiry in October 1990.
Another related term of reference was to consider whether the profitability of the banking
sector was appropriate. The record bank profits of the late 1980s that underlay this reference
have, however, been succeeded by some very poor results.
The Martin Inquiry considered banking competition at length.22 It noted that although there
were more than thirty licensed banks, the average retail customer effectively had a choice of
the four majors and perhaps a State bank and one or two new banks (generally ex-building
societies). This choice could be substantially restricted in smaller (e. g. rural) communities or
where consumers were restricted to banks within walking distance.
The inquiry concluded that a range of six or so banks, together with nonbank financial
intermediaries (building societies, credit unions etc) represents a reasonable choice for most
consumers.23 Indeed there are some arguments (supported by the current reduction in bank
staffing levels) that Australia, with less than eighteen million people, is still oversupplied
with banks.
The committee, however, appropriately expressed concern over any increase in the current
concentration of the banking industry.24 Any combination of the current four ‘majors’ would
significantly change the current balance of four roughly equal competitors to one bank having
a dominant lead on its two remaining rivals. In line with this concern for ensuring continuing
competition, the government’s refusal to allow the ANZ and National Mutual Life to merge
should be generally supported.
But even without further concentration, comfort in a ‘reasonable choice’ of retail banks
depends on the banks operating competitively; that is, in a non-collusive manner. Confidence
would be undermined if the four majors were to form a cartel and effectively make joint
decisions on product interest rates and conditions. Such a cartel need not be formally
organised, but rather could rest informally on an understanding that one bank operates as a
price-setter with the others following. Information on such informal understandings is, not
surprisingly, often anecdotal and open to varying interpretations.
No formally organised banking cartel appears to exist. The last such entity, formally
organised to control the jointly launched Bankcard product, was disbanded in the late 1970s
after trade practices legislation was enacted.
The signs of an informal cartel between the majors are ambivalent. Each monitors the others’
product rates and conditions closely, and changes in rates and product conditions frequently
occur close together. But this can also be characteristic of competitive markets, and certainly
there is great variation in which bank leads the changes.
15
Indeed, the price leader in banking, if there is one, is the Reserve Bank of Australia as the
operator of the nation’s monetary policy. In the vast majority of cases major bank interest rate
changes have closely followed those in official interest rates, with only jockeying for position
between the major (and lesser) banks. Moreover, there are regular ‘discussions’ between the
Reserve Bank and the majors (sometimes all together) about the state of the banking industry
and apparently including, from time to time, suggestions by the Reserve Bank as to the main
focus of future banking interest rate shifts. Even in its public announcements of official
interest rate changes, the Reserve Bank can be disingenuous:
Contrary to some media reports, the Reserve Bank has not been pressuring the banks to
reduce their lending for housing. Rather, it has been making the point that, from a macroeconomic perspective, the housing area does not need further special encouragement for new
borrowers at this time and that the Bank would wish to see further reductions in lending rates
concentrated in the business area.25
Deregulated guidance includes not only such ‘suggestions’ but also the occasional formal
agreement, such as in September 1989 when the banks agreed to cap the ‘deregulated’ home
lending rate at 17% in return for the monetary authorities increasing the interest rate paid on
banks’ compulsory deposits with the central bank.
It is difficult not to see this set-up as some kind of officially directed cartel. Such
arrangements do not encourage completely independent setting of product rates by each bank.
Price-setting might be more independent than it was before deregulation, but it is still a long
way from the decentralised decision-making of free markets. There might, of course, be
strong pragmatic arguments in favour of this continued involvement of the monetary
authorities — but, to the extent that they are involved, the monetary authorities must also
accept some responsibility to ensure that bank interest rates, in their entirety, are appropriate.
The Reserve Bank’s general defence that it is concerned primarily with macro-economic
factors does not fully excuse its selective intrusion in the setting of bank product interest
rates.
In a competitive market all bank products would be subject to market forces, and all would be
affected by shifts in official and other rates. This has not been the case —products such as
credit cards and traditional passbook savings accounts have changed remarkably little since
the early 1980s. If the official focus had spared time for credit card debtors or traditional
passbook savers as well as for home and business borrowers, this is unlikely to have been the
case.
An additional restraint on competition is the degree of difficulty a consumer faces in shifting
from one bank to another. Changing banks involves not only legal, government and bank
charges to (say) transfer a mortgage or other debt but also the sheer time and annoyance in
rearranging financial arrangements involving, for example, new account identification
requirements and redirecting automated salary and other payments.
Despite these impediments, there are clear signs that banking is more competitive than it was.
Banks are launching new products to steal an edge on their competitors. Banks are heavily
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cutting their costs, including staffing, to compete as lower-cost producers. Product rate
changes, even apart from those induced by official policy, are more frequent and more
responsive to market conditions. Banks are advertising more competitively in terms of rates.
These improvements are largely the result of the deregulation of the financial system and the
general move in the economy towards more free market practices.
But the potential for collusion (including that inspired by the monetary authorities) between
the major banks is real. It requires a continued emphasis on competition by such bodies as the
Trade Practices Commission and the Prices Surveillance Authority to ensure that the current
competitive fervour in retail banking is extended and not gradually eroded. In addition the
monetary authorities need to be more mindful of social justice as well as macro-economic
priorities, particularly if they impede competition via deregulated guidance.
Have there been losers from deregulation?
Even if deregulated freer markets adapt appropriately and fairly in the future, there remains
the potential for some to be losers in the shift from more regulated banking. Some sectors of
the community with protected positions before deregulation have lost those positions without
compensation. Such people might now have a greater choice of banking services and might
benefit from a more efficient financial sector overall, but have lost previously held buying
power in the market relative to others.
For example, a small business with a well-used cheque account and overdraft facility will
probably be a net loser from deregulation due to sharply higher transaction fees and relatively
higher borrowing margins. Similarly, a retail customer with only a low-balance transaction
account will probably be a net loser through deregulation as rising transaction fees emerge
(offset by higher bank deposit rates not received by low-balance depositors).
Note that we are not saying that the changes are necessarily inappropriate. The use of freer
market forces encourages people to choose and pay separately for the services they use. So,
for example, two customers with the same average deposit balance but with very different
transaction levels might have been given the same interest by a bank before deregulation. The
low transactor was effectively subsidising the person with numerous transactions as the
deposit interest rate was kept low enough to cover the average transaction handling cost.
Since the early 1980s there has been a gradual move towards higher deposit interest rates
coupled with the spread of ‘user pays’ transaction fees. There will always be debate on how
these fees should be calculated, with the banks generally saying they are well under true cost,
but it is difficult to disagree with the principle — particularly when it might encourage retail
consumers to adjust their banking behaviour to reduce unnecessary transactions.
But even in this light it is difficult to generalise that retail banking customers have come
through the deregulation process at a relative disadvantage to others such as large corporate
clients. Both retail and corporate segments cover a wide range of situations: a retail customer
with bank investments might well have benefited with deposit rates moving closer to market
17
rates. Corporate clients with high transactional activity and lower credit ratings might not
have gained.
It is also difficult but important to consider the overall and longer-term gains of having a
more efficient financial system. It would be to the whole community’s benefit if funds were
allocated to more productive rather than less productive investments.
Moreover, allowing that the corporate sector might have been major beneficiaries from
deregulation does not necessarily mean that retail customers lost an offsetting amount. The
real losers include bank staff, whose numbers have fallen sharply and whose job security and
conditions have suffered, and possibly bank shareholders.
Other specific losers from deregulation would include those who, because of disability, poor
English or poor financial or technological literacy, require extensive face-to-face banking
services. The free advice and services that banks provide as part of a customer relationship
have been and will be under increasing pressure in a deregulated environment in which staff
time needs to be more accountable and linked to some profit- oriented bank product. It is also
less likely that tailored product innovation will reach the specific needs of small
disadvantaged groups.
It is not that banks are unsympathetic to the plight of such disadvantaged groups or that they
would be unaware of the image benefits that might accrue to publicised sympathetic action.
However, the balance of forces operating within a bank has shifted with deregulation towards
giving greater weight to actions that justify themselves on profit-making (or cost- cutting)
grounds.
Did bankers have a social responsibility to withstand these competitive pressures as they
affect some or all of these disadvantaged groups? If so, what was the deregulation meant to
achieve? Or, given that the deregulatory shift to these market forces was a deliberate and
considered government policy, should the government have compensated or ensured
protection for some or any of these losers — the high transactors, the small to medium sized
borrowers, the disadvantaged sectors, the bank staff — or did they consciously decide that the
loss of market power by these groups was appropriate?
Against the background of all Australians being challenged to be more productive, the
‘losses’ of the wider groups should be seen as part of the cost of moving to a more efficient
financial system and economy that will benefit all in the long run. For example, high
transactors have benefited in the past unfairly, to the detriment of low transactors and
restraining the efficiency of the financial sector.
But most of us would feel that it is a different situation for the disadvantaged sectors such as
the physically disabled, the illiterate and the financially illiterate, who also lose as their
particular needs receive less treatment in a competitive banking environment. Most would
feel that these groups have a good case either for budgetary assistance or for pro-active
remedial action such as financial literacy campaigns, or by ensuring, via widening the
meaning of a banking licence, that these groups continue to receive appropriate banking
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attention. Not that such action is without cost to the rest of us, but this cost would be deemed
appropriate and the effects of deregulation to these groups unintended.
The view expressed by some that the budgetary assistance mechanism, as opposed to other
alternatives, should always be used to avoid any distortions in the banking system seems a
little naive. We do not have a pure free market that should not be tainted; rather we need to
adjust the ground rules (including consideration of all likely effects) to achieve an appropriate
banking market. The most pragmatic solution clearly depends on the nature of the problem.
For example, providing the blind with enough budgetary assistance to employ sighted
companions is unlikely to be as productive as directly encouraging banks to (say) include a
voice option and touch-identifiable keys on their automatic telling machines.
We need to ensure that disadvantaged groups, further disadvantaged by the shift to
deregulation, are not forgotten but that the most pragmatic remedial action is taken. As there
is no government agency clearly responsible for considering this issue, it might be appropriately handled by a church or peak social service body. The dignity of the people
concerned, as well as their economic well-being, needs to be considered.
Have banks abused customer ignorance and inertia?
Traditional passbook accounts paid interest at 3.75% (6% if more than $4000) throughout the
record market interest rates of the 1980s. Balances remained at around $9 billion, despite
other call deposit accounts paying substantially higher interest.
Banks defended their practice to the Martin Inquiry principally on the basis that high
handling costs offset the low deposit interest rates paid on these and on cheque accounts.26
Clearly some accounts, such as high transaction cheque accounts, would have significant
handling costs. But traditional passbook accounts, many largely dormant, do not easily fall
into this category. In any case handling costs would not rise and fall to offset market interest
rate movements. If competitive forces had been at work, or if banks had felt an obligation to
maintain an equivalent return to their customers on this product, the interest rate on these
passbook balances would have changed frequently during the 1980s.
The banks adopted a policy of product differentiation and marketed only some products (such
as investment savings accounts early in the 1980s and later term deposits) on the basis of
competitive interest rates. Some call products, particularly those with large rolling balances,
were allowed, without any advice to the customer, to become less rate-competitive as market
rates rose. The banks’ more aware (and more mobile) depositors and borrowers benefited to
the extent that customer inertia or ignorance left deposit balances at well below market rates
(even after allowing for handling costs), with this ‘subsidy’ permitting lower borrowing rates
and higher rates on competitive deposits.
Product differentiation is by no means unusual and can lead to added value via a meaningful
extension of customer choice. This is not evident in the above case, however, where there
was often not a great difference in the products offered (minimum balance and transaction
sizes being only minor modifications). It is hard to conclude anything other than that the
19
banks were simply taking advantage of customer inertia and ignorance. Ignorance here
includes not knowing the current bank product rate level. Despite recent improvements, even
now not all bank product rate changes are advertised in the press and certainly are not advised
to each customer (even when statements are despatched or passbooks updated).
Remember that much of the benefits of free market forces (such as efficiency) are based on
assumptions of participants being adequately informed and capable. The above practice
seems to represent a rather hollow form of consumer sovereignty and to undermine
confidence that deregulation will achieve its limited promise. Proactive adjustment of the
ground rules is required and is being partly achieved in many ways ranging from such
initiatives as the pension deeming arrangements (clumsy though it may be) to the State and,
more recently, Federal Government initiatives to improve disclosure requirements.
Customer ignorance has also been seen as contributing to poor choices of retail banking
products, such as inappropriate or excessive debt or guarantor commitments, unaware acceptance of unfair financing conditions or rates and undue reliance on credit cards for continuing
debt. These issues have been addressed fully by consumer groups27 and have resulted in
sharply increased efforts to improve disclosure standards for financing products and bank
codes of conduct covering dealings with their clients.
The extent of time taken and the conflict between banks and the state consumer affairs bodies
over proposed uniform credit legislation should not in itself be seen as problematic. Indeed it
should be seen as symptomatic of a long-overdue consultative (and gradual consensusforming) process of bringing banking and consumer realities together.
Since the late 1980s significant progress has been achieved. The 1988 electronic funds
transfer code of conduct, now contractually part of every EFT transaction, has proved that an
effective and acceptable code can be developed and enforced. The banking industry’s
ombudsman scheme, prompted certainly by community and government pressure, was none
the less a voluntary initiative of the banks and has worked extremely well, including at the
intangible level of gradually communicating to consumers that they have rights when they
experience a problem at the bank counter. Possibly more importantly, it has prompted each
retail bank to upgrade and stress its internal dispute resolution mechanisms on the grounds of
both justice and good commercial practice.
Why are further prompts for such initiatives necessary? The Martin Inquiry looked at the
issues of disclosure and the banker-customer relationship in depth and included pragmatic
consideration of the various alternatives.28 It concluded that ‘market forces are not of
themselves sufficient to ensure that bank services are delivered on fair and equitable terms’29
and recommended both the consultative development of a general banking code of conduct
under the auspices of the Trade Practices Commission and, where appropriate, modifications
to banking legislation. Although consumer groups sought greater statutory enshrinement of
consumer protection, this was rightly felt to be dangerous and inflexible given the rapid
changes in the financial system. A banking code of conduct is, at the time of writing, being
developed by the Trade Practices Commission and the Federal Treasury. It is assumed that
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the views of consumer lobby groups as well as banks will contribute to the result. A
consultative development and continuing review of the code should enhance protection as
well as ensuring that the various parties continue to talk together. Bankers will recognise
consumer lobby viewpoints; lobbyists will be acquainted with the costs and pragmatic considerations of the programs they seek.
One can almost see these positive steps as a consequence of deregulation: the changes in
banking, including those contrary to retail consumers, both aroused consumer discontent and,
directly and indirectly, enhanced public awareness of banking issues. This public prominence
has led to stronger remedial action.
But in addition to these steps now in train, longer-term work is also required in related areas,
such as improving financial literacy education at schools and in the community and more
staff training within financial institutions.
Have banks handled credit cards responsibly?
Credit card interest rates have also received extensive if not balanced media attention. Much
has been made of the stubbornly high interest rates until recently, with most above 20%. With
the normal monthly payment cycle and the varying additional interest-free periods it needs to
be noted that about a third of the credit card debt that the banks fund does not earn them any
interest. While nominal interest rates might be 21-22%, the effective interest rate that a bank
earns might be closer to 14%. The fees paid by the merchant on credit card sales (ranging
from close to zero up to 5%) were, however, originally meant to cover this non-interestearning debt as well as part of the transaction handling costs.
Two government reports, the Damania and Gaudion Reports of 1989, attempted to consider
all aspects of the banks’ credit card operations and concluded that the operations were either
just breaking even or still earning a loss on the banks’ overall investment.30 The Prices
Surveillance Authority commenced a fresh analysis in June 1992 as recommended by the
Martin Inquiry and found that credit cards had recently become profitable. Indeed, the sharp
drop in both market and other bank interest rates since the record levels of 1989 would
suggest that credit card interest rates might have stayed excessive throughout 1992 even after
two drops. Certainly the dearth of changes in credit card interest rates over the decade before
1992 suggests that they were not competitively priced.
There are other issues involved rather than just the interest rate level. The banks have argued
for the freedom to apply an annual card fee. They note the existence of a significant body of
cardholders who use the card primarily as a cost-less transaction card with free credit by
regularly paying off the debt before the monthly due date. They point to the non-interestbearing debt of these (on average higher-income) card-users as the basis for the above market
interest rates charged to those unable to pay off their debt. It is difficult to disagree that such
a cross subsidy from poor to rich is inappropriate, nor that transactions via credit cards should
not avoid fees that are appearing on many other accounts. If unnecessary transactions cost the
economy, there is no reason why those able to use credit cards should be able to avoid a
21
pricing disincentive. To the extent that state laws are hindering such sensible change they
should be deregulated.
But are the banks’ actions flawless? Why do ten of the twelve cards offered by the four
majors still have interest-free periods in addition to the monthly payment cycle?31 Could it be
that banks are afraid of losing higher-income customers to other banks? Perhaps even if they
make little or no profits on their cards the banks feel that the overall customer relationship is
profitable and worth maintaining. Given that card operations are long-term and capitalintensive and only part of a bank’s overall retail banking service, such an approach is quite
reasonable and likely. It does, however, undermine the banks’ reliance on product
profitability to justify current high credit card rates.
Arguments by the banks that credit card problems are due to the fact that their pricing is still
regulated sit poorly with the bank practice that requires merchants to charge the same for
both cash and credit card purchases. As the Martin Inquiry concludes, this is ‘contrary to the
user pays philosophy supported by banks. The cash customer should not be required to subsidise the credit card customer’.32
Change in bank credit card arrangements are clearly overdue. Action is required if those
unable to repay credit card debts have these debts compounding at rates in excess of 20%,
supposedly to subsidise those who can. This is neither economically fair nor socially
supportive of the common good. Credit card pricing is not one of banking’s success stories,
with anecdotal evidence that banks were more interested during the 1970s and 1980s in
increasing market saturation than in giving thought to the impact of the much-marketed
interest- free period on various consumers. Certainly credit cards appear to be a less
competitive component of retail banking (not solely due to legislative constraints) and one
that warrants close attention by consumer regulatory authorities, as is being given at the time
of writing.
Should basic banking be seen as an essential service?
By the year 2000 (not so far ahead now) it has been projected that 95% of wages and salary
payments and 70% of shopping will be conducted electronically.33 Most pension and other
support payments require a banking connection. Various surveys suggest that approximately
5% of adult Australians do not have a banking account.34 Simultaneously the ‘user pays’ fees
trend on banking products is likely to be increasingly extended, particularly on the less
profitable low-balance transaction accounts which are more likely to be held by the poor.
There is a danger of growth in the ‘unbanked’, a new grouping effectively excluded from
economic citizenry.
In many overseas countries, refusal by banks to cash cheques for certain people or refusal to
allow them to open accounts has resulted in governments requiring banks to provide a basic
banking service to all.35 Although variously defined, such a service seems to include:
•
•
a safe, accessible place to store money,
a mechanism to obtain cash from the account,
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•
•
•
a mechanism to make third-party payments,
an ability to cash government cheques and to deposit third-party cheques, and
a zero or capped low overall cost.
Variations seem to rest on the number of fee-free transactions permitted and whether both
face-to-face and automated banking services are included.
Although anecdotal evidence suggests that some banks have referred undesirable customers
elsewhere, such as to the Commonwealth Bank, Australian banking does not seem to have a
significant problem with refusal to accept certain customers — but the trends are in place.
The Martin Inquiry recommended that the retail banks and the Department of Social Security
together explore the development of a basic banking product to be made available to all. If
the banks should choose not to respond to this initiative, some compulsion would appear
appropriate to ensure that an element of divisiveness in the community is avoided. This could
be done simply by making a basic banking product a condition of being granted a banking
licence.
There will be those who argue that such social assistance should be provided from the budget
and not within the banking system. This is ludicrous —how much would have to be paid to
such ‘unbankable’ consumers before they become attractive? Banks themselves benefit from
the structure of the banking system and its regulation (for example, via the Reserve Bank’s
role and perceived protection) in a host of ways other than by budgetary assistance.
Moreover, it is not just a question of ensuring the financial system’s ground rules to protect
the disadvantaged. The value of the financial system to all its participants, private business
and government agencies alike, partly depends on its full coverage.
The question of basic banking service, however, extends beyond the economic arguments of
efficiency and coping with public good aspects. With the intrusion of banking into so much
of modern economic life, access to banking services has become a prerequisite for
community participation — it has become an essential element in the preservation of the
dignity and rights of the individual.
Concluding assessment
It is difficult not to see advantages to the community as a whole in the deregulatory shift from
direct and intrusive banking controls to an industry where banks, within a system of overall
prudential supervision, are encouraged to compete in product range and pricing.
However, this paper has endeavoured to show that the questions we need to ask and the
issues we need to address go beyond supporting or lamenting the deregulatory changes of the
1980s. What was and is essential is establishing and maintaining the ground rules within
which freer market forces can operate, ground rules that ensure desirable outcomes both
economically and in terms of social justice.
Those who argue in simplistic terms against regulation on the grounds that it fetters banking
competition need to be reminded that competition in banking is not assured given the
23
dominance of the major banks, the almost cartel-like arrangements with the Reserve Bank of
Australia, the uneven power balance between banks and the typical retail consumer and the
experience with bank actions on traditional deposit and credit card products. They might also
be reminded of the value of the Reserve Bank’s supervision and depositor protection charter,
which the banks and the whole community enjoy.
Ensuring that the competitive impetus of the 1980s is maintained and directed to the
community’s benefit will require a continuing conscious watch-dog role by the relevant
regulatory authorities including the Reserve Bank of Australia (responsible for monetary
policy and banking supervision), the Trade Practices Commission (responsible for competition policy and increasingly for consumer protection) and the various governments
themselves. Much has already been achieved, and many areas of remaining concern are being
addressed at the time of writing.
A few issues, however, appear to have been neglected. The accidental casualties of
deregulation, the disadvantaged community groups, those who were poorly placed to jockey
for position in the freer market or who relied on banks’ paternalistic ‘free’ service, appear to
need advocacy to achieve pragmatic remedial action, whether this be compensation from the
budget or modification of the community’s expectations of banking licence holders. And,
equally fundamentally, a basic financial literacy campaign, integrated into our education
systems, is needed to supplement the efforts to achieve more balanced banking practices.
Most importantly, the community needs to believe that it has the right to demand a financial
system that meets its requirements and that evolves via consultation with all parties. Not only
do the current reform initiatives need to be nurtured to completion but ‘ownership’ of the
future financial system must be seen to be vested in the community it serves. As the Reserve
Bank told the Martin Inquiry:36
It is never simply a matter of there being regulation or market forces, and those elements need
to be mixed up in a way that is calculated to generate the greatest possible benefit for the
majority of Australians.
So were and are bankers at fault? The corporate excesses of the 1980s are well known and
undoubtedly affected the general level of ethics throughout business and banking
management. Certain decisions and non-decisions as far as retail banking are concerned must
rightly now be making certain bankers squirm. But there are probably few industries or
human endeavours where this is not the case.
As the Reserve Bank is fond of saying, banks and regulators are learning from their mistakes.
The danger is that over time they will forget. And that over time the broader community, the
rest of us, will let them.
Finally, when we have altered the law, established codes of conduct, equipped consumers
with skills and rights of redress, provided protection for the disadvantaged — when we have
exhausted the wisdom of the ‘wise steward’ we need to remember that we are not done.
There will always be new modifications to these ground rules required for ‘free’ markets to
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work, always exceptional circumstances that call the banker to move beyond them, always
the call of human dignity and human rights and always the call of the ‘new creation’.
Appendix: An overview of Australian banks and their operations
The report A Pocket Full of Change (released by the Martin Inquiry37 in November 1991)
describes the banking industry as the key group within the Australian financial system. In
June 1991 Australian banking group assets exceeded the asset totals of nonbank financial
intermediaries (NBFIs) (such as finance companies, building societies and merchant banks)
and of life office and superannuation funds combined.38 Since the early 1980s banks have
reclaimed business from the NBFIs.
The Australian banking industry comprises the four major nationally operating banks, the
state banks, some smaller domestic (generally niche or regionally operating) banks and
seventeen foreign banks. The four major banks (ANZ, Commonwealth, National Australia
and Westpac) continue to dominate the industry with almost three-quarters of total Australian
bank deposits.39 The state and smaller domestic banks (some of which were formerly building
societies) tend to operate in regional or niche markets. The foreign banks have generally
involved themselves in wholesale or corporate rather than retail banking, with the largest,
Citibank, holding just over 2% of Australian deposits.40
Compared with eight other major economies Australia has, adjusted for population, ‘the
second largest overall banking distribution network behind France’ and scores highly for
branch and agency networks, for automatic telling machines and for electronic funds transfer
outlets. 41
Clearly the character of a bank will vary according to its size and background. Given their
retail banking dominance this appendix will look at a typical major bank to better understand
the people on the other side of the bank counter.
The typical major bank has around 30 000 full-time staff and four thousand or so part-time
staff working primarily as branch tellers or customer service staff over peak times. These
staff are spread between head office and around 1300 branches, ranging from two-person
outlets to the largest offices with hundreds of staff. In addition the bank also has an agency
network to support (the Commonwealth has by far the largest with about 4600 agents).42
These branches (and to a lesser extent agencies) spread across Australia generally need to
provide identical bank services with up-to-date records; internal communications
consequently present a major problem for the bank. During the 1970s and 1980s all of the
major banks have achieved an integrated on-line national computer network which allows
simple banking services to be handled uniformly. These massive computer systems have,
however, generally been product-based, so the bank’s information on a particular customer is
often split between a number of product systems. This helps to explain why customers often
have to provide the same information, such as name and address, for each of their various
accounts. Most large banks are still endeavouring to bring their different systems together to
25
improve their risk management, marketing and customer service and to reduce their labour
costs.
Before a new bank policy or product can be launched, effective handling capacity has to be
installed all over Australia. Systems have to be tested. Instructions have to be printed and
distributed to each point and read and understood by the thousands of staff involved. The
logistical pressures might be compounded by national advertising deadlines and campaigns
conflicting with local conditions not understood at the bank’s head office. Not surprisingly,
difficulties and confusion arise at the branch counter causing customer annoyance.
A large proportion of bank staff are relatively young and inexperienced, reflecting both a
high turnover of young branch staff throughout the 1980s and increasing diversity and
complexity of banking products, which have at times outstripped staff training. Banks have
recently increased their efforts to retain experienced staff, especially women, with more
flexible working arrangements. The high staff turnover has also reduced because of recent
high unemployment.
Partly to counter these communication, training and customer service problems the typical
major bank has established a level of specialisation in its branch networks to handle the more
complicated types of business. This generally includes the establishment of corporate centres
to win and service business accounts as well as regional groupings of retail branches with
additional expertise and control in the regional office. An earlier attempt to give local
managers directly more discretion in lending and business accumulation has largely been
absorbed into these regional offices, partly in response to bad debt experience.
The typical major bank is still confronting the basic problem of encouraging its branch staff
to ‘service its retail customers’ rather than just handle transactions. This is exacerbated both
by strong pressures on profitability that force banks to reduce operational costs and by the
long lead times required for changes to the computer systems that support existing banking
products (and determine their handling). The pressure on operational costs has made its mark
on bank staff levels, with the typical major reducing numbers by more than 5000 (or 15+%)
since the late 1980s (largely through natural attrition and reduced recruiting).
The complexities and capital intensity of computer systems and the need for bank-wide profit
and risk management ensures that a relatively strong head office exists in the bank. It is this
head office that determines the products that will be offered, the price at which they will be
offered and how the transactions are to be handled and reported. It is not surprising that
branch staff sometimes feel as if they are sandwiched between irate customers and an
inflexible head office.
Lending decisions are controlled by a hierarchy of delegations ranging from the local
manager (say, up to $300 000) through regional manager (say, up to $3 000 000) to head
office (say, up to $15 000 000) and, for more substantial exposures, a credit committee made
up of members of the bank’s board. Such a credit committee might meet weekly, while the
board itself would meet monthly to review the overall strategic direction and performance of
the bank. Operational management of the bank including major product rate changes, would
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normally be facilitated by a daily meeting of the senior head office department heads with the
chief executive officer. There have been examples where the relatively rigid product
guidelines and delegation structures have influenced some local managers to channel certain
business proposals into less appropriate products where the delegation or handling procedures
are easier.
Banks offer a wide range of loan, deposit and other services to the full spectrum of retail,
corporate, interbank and international customers.
Table 1 provides perspective via a simple balance sheet breakdown of the average major
bank.
Such are the institutions that deal with hundreds of thousands of customers each day,
accepting deposits and making withdrawals over the counter, via a machine or via automated
payments, and lending money such as through a credit card purchase, a house mortgage or
through honouring a cheque on an overdraft account. These are the complicated entities that
almost all Australians face, with varying degrees of satisfaction.
Table 1 Components of a typical major bank’s balance sheet43
Assets
Housing loans
Liabilities
21. 2% Cheque accounts
10. 1%
Credit card loans
1. 2% Traditional passbooks
1. 9%
Other personal loans
6. 2% Investment passbooks
7. 5%
Business loans
22. 6% Statement savings acc
1. 9%
Bill acceptances
13. 8% Cash management acc
4.8%
Money market loans/sec
12. 6% Term deposits
16. 9%
Government securities
7. 0% Money market deposits
12. 5%
Foreign currency ass
4. 7% Bill acceptances
14. 2%
Other
10.7% Foreign currency liab
Other
9. 9%
10. 4%
Capital
9. 9%
27
Endnotes
1
These were the Australian Financial System (Campbell) Inquiry Interim Report 1980 and Final Report 1981,
the Australian Financial System Review Group (Martin) Report of 1984, and the House of Representatives
Standing Committee on Finance and Public Administration (Martin) Report, A Pocket Full of Change, 1991.
2
A brief authoritative list of the changes in banking regulation over the 1970s and 1980s can be found in B. W.
Fraser, ‘Financial deregulation and the rural economy’ in the Reserve Bank of Australia’s Bulletin, March 1990,
and in Appendix 1 of the Reserve Bank of Australia’s Submission to the House of Representatives Standing
Committee on Finance and Public Administration, January 1991.
3
See, for example, Exodus 22:25-7, Leviticus 25:35-7, Deuteronomy 23:19-20, and Nehemiah 5:6-13.
4
See, for example, Matthew 25:27 and Luke 19:23, and Matthew 5:25-6 and Luke 12:58-9.
5
Such as in Matthew 18:23-35.
6
As illustrated in the turning over of the tables of the money-changers in the temple in Matthew 21:12-3,
Mark 11:15-7, Luke 19:45-6 and John 2:13-17; and more explicitly in Matthew 22:15-22, Mark 12:13-17 and
Luke 20:20-26.
7
Mark 12:17.
8
Such as in Matthew 25:14-30 and Luke 19:12-28.
9
Such as in John 13:34, 2 Corinthians 5:17 and Matthew 9:17, and indeed as foreshadowed in Isaiah 65:17-25.
10
See, for example, John F. Sleeman, ‘Just price and just wage’ and ‘Usury and interest’ in Macquarrie, John
(ed.), A Dictionary of Christian Ethics, London, 1967.
11
Pope John Paul II, Centesimus Annus, p. 40 cited in Department of Social Development and World Peace, A
Preliminary Summary of ‘Centesimus Annus’, Washington DC.
12
Department of Social Development and World Peace, A Preliminary Summary of “Centesimus Annus”,
Washington DC, p. 1.
13
This is not intended to be a rigorous treatment of the ‘perfect competition’ ideal type discussed in pure
economic theory; rather an example of the mutual gains of decentralised and flexible decision-making intrinsic
in the popular understanding of competitive forces. For a more theoretical discussion of competition theory,
with relevance to the financial system, see A Pocket Full of Change, pp. 63-7.
14
As measured by the banking sector’s share of total financial intermediary assets, p. 25, A Pocket Full of
Change, 1991.
15
Australian Financial System (Campbell) Inquiry (1981), Final Report, Canberra.
16
For a detailed record of the changes in banking regulation over the past two decades see either ‘Financial
deregulation and the rural economy’ in Reserve Bank of Australia Bulletin, March 1990 or Appendix 1 of
Reserve Bank of Australia, Submission to the House of Representatives Standing Committee on Finance and
Public Administration (the Martin Committee), January 1991.
17
Campbell Committee, Australian Financial System Inquiry, 1981.
18
See their summary in A Pocket Full of Change, pp. 88-101.
19
See ‘Bank interest rate margins’ in Reserve Bank of Australia Bulletin, May 1992.
20
A Pocket Full of Change, p. 93.
21
As measured by share of Australian deposits — see endnote 39.
22
See A Pocket Full of Change, Sections II and V.
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23
A Pocket Full of Change, p. 370.
24
See A Pocket Full of Change, pp. 121-8.
25
Statement by the Governor, Mr B. Fraser, entitled ‘Monetary policy’. Reserve Bank of Australia (No. 92(11), 6
May 1992.
26
A Pocket Full of Change, p. 367.
27
See, for example, the submissions of Australian Federation of Consumer Organisations, Australian Consumer
Association and Australian Financial Counselling and Credit Reform Association to the Martin Inquiry.
28
A Pocket Full of Change; see in particular chapters 20 and 21.
29
A Pocket Full of Change, p. 388.
30
The reports and their outcomes are described in A Pocket Full of Change, p. 359.
31
A Pocket Full of Change, p. 360.
32
A Pocket Full of Change, p. 365.
33
From a submission to the Martin Inquiry.
34
For a good coverage, see Singh, Supriya, ‘The consumer and financial institutions: Access, information and
prudential supervision’, Part 2 of submission by AFCCRA, ACA and AFCO to the Martin Inquiry, pp. 4-9.
35
For a brief summary, see A Pocket Full of Change, p. 448.
36
Governor of the Reserve Bank of Australia, evidence to the Martin Inquiry, p. 431.
37
Formally the House of Representatives Standing Committee on Finance and Public Administration.
38
See Table D5, Reserve Bank of Australia Bulletin, December 1991.
39
As at March 1992 — from Table B9 in Reserve Bank of Australia Bulletin, May 1992.
40
See Table B9, Reserve Bank of Australia Bulletin, May 1992.
41
A Pocket Full of Change, p. 49.
42
See Tables B18 and B19, Reserve Bank of Australia Bulletin, September 1991.
43
Data compiled from Tables B1, B2, B4 and B5 of Reserve Bank of Australia Bulletin, May 1992, after
discussion with Reserve Bank staff. Data corresponds to all Australian banks but remains representative of the
majors on account of their dominance and because the other corporate- focused (largely foreign) banks and
retail-oriented former building societies tend to balance each other. The figure for traditional passbook
deposits, a residue from earlier decades, however, might be understated for the majors.
29